Forced property sales to soar as fixed mortgages expire

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Ten consecutive interest rate hikes from the Reserve Bank of Australia (RBA) is starting to take a toll on Australian mortgage holders, with Westpac boss Peter King claiming house repossessions are now at Global Financial Crisis levels.

“Interest rates are a blunt tool, what we’re looking at in our portfolio is who might need help”, King said.

“The part of the portfolio we’re watching very closely are high debt to income – that’s people who borrowed to their maximum debt capacities”.

“The pressure is going to build when people come off fixed rate mortgages”.

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Commenting on King’s remarks, Executive Chairman of Yellow Brick Road Home Loans, Mark Bouris, said he “is not surprised because the general position of these interest rate hikes by central banks is to keep doing it until they break something”.

“What they want to break this time is consumers. And one of the consequences of breaking consumers is they have to sell their houses or the banks take possession”.

“We’ve got around 18 months and around 1.2 million borrowers who are going to go from paying 2% to nearly 6%. So that’s three times [the increase] and you are going to be paying a lot more a month. So it’s a big, big problem”, Bouris warned.

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“Most of those people who are paying the fixed rate are just living hand-to-mouth anyway because the cost of living has generally increased as well”.

“For an average mortgage, they are going to be paying at least $1,000 to $1,500 a month… After tax dollars… Where are they going to find it?”

“It’s a big drama. Major drama. That’s where we are going to see the defaults, arrears and delinquencies”, Bouris concluded.

The fixed rate “mortgage cliff” will put borrowers under growing pressure even if the RBA keeps rates unchanged.

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Over the next nine months, around 600,000 borrowers will convert from rates of about 2% to rates of between 5% and 6%, according to Australian Bankers Association research of the Big Four Banks:

Fixed rate mortgage expiry

As illustrated above, approximately three times as many mortgages (222,800) will expire during the June quarter as during the March quarter (78,300).

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There will also be large numbers of fixed rate mortgage expirations in the quarters ending in September (208,000) and December (184,000).

Mortgage rates have already risen above the 3% serviceability buffer that APRA required from banks when these fixed rate mortgages were originated.

Thus, a large number of borrowers could be pulled deep underwater as their fixed rate terms expire over coming months.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.